1. What is the present value of $75 at the end of year 1, $225 at the end of year 2, and $300 at the end of year 4? There is no cash flow at the end of year 3. Use a discount rate of 6.25%

a. $411.57

b. $433.23

c. $456.03

d. $480.03

e. $505.30

2. What is the dollar difference between the future value of $100 invested for 50 years at 10% interest compounded yearly or 10% per year using simple interest?

a. $9,091.57

b. $10,035.23

c. $11,139.09

d. $12,876.03

e. $13,505.30

3. Whats the future value of $1,200 after 5 years if the appropriate interest rate is 6% compounded MONTHLY?

a. $1,537.69

b. $1,618.62

c. $1,699.55

d. $1,784.53

e. $1,873.76

4. What is the EAR (or EFF) rate if the bank pays nominal 4.5% compounded monthly?

a. 3.72%

b. 4.13%

c. 4.59%

d. 5.05%

e. 5.56%

5. Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant?

a. The present value of a 5 year, $250 annuity due will be lower than the PV of a similar ordinary annuity.

b. A 30-year, $150,000 amortized mortgage will have larger monthly payments than an otherwise similar 20-year mortgage.

c. A bank loans nominal interest rate will always be equal to or greater than its effective annual rate.

d. If an investment pays 10% interest, compounded quarterly, its effective annual rate will be greater than 10%.

e. Banks A and B offer the same nominal annual rate of interest, but A pays interest quarterly and B pays semiannually. Deposits in Bank B will provide the higher future value if you leave your funds on deposit.

6. You plan to invest some money in a bank account. Which of the following banks provides you with the highest effective rate of interest? Hint perhaps this problem requires some calculations.

a. Bank 1: 6.1% with annual compounding

b. Bank 2: 6.0% with monthly compounding

c. Bank 3: 6.0% with annual compounding

d. Bank 4: 6.0% with quarterly compounding

e. Bank 5: 6.0% with daily (365-day) compounding

7. Whats the present value of a perpetuity that pays $250 per year if the appropriate interest rate is 5%?

a. $4,750

b. $5,000

c. $5,250

d. $5,513

e. $5,788

8. Suppose you inherited $275,000 and invested it at 8.25% per year. How much could you withdraw at the end of each of the next 20 years?

a. $28,532

b. $29,959

c. $31,457

d. $33,030

e. $34,681

9. What is the present value of the following cash flow stream at a rate of 8.0%, rounded to the nearest dollar?

Cash flows: today (t =0) it is $750, after one year (t =1) it is $2,450, (t = 2) it is $3,175, and (t=3) it is $4,400.00 draw a time line.

a. $7,917

b. $8,333

c. $8,772

d. $9,233

e. $9,695

10. Whats the present value of $1525 discounted back 5 years if the appropriate interest rate is 6%, compounded monthly, rounded to the nearest dollar?

a. $969.00

b. $1020.00

c. $1074.00

d. $1131.00

e. $1187.00

11. Suppose your credit card issuer states that it changes a 15.00% nominal annual rate, but you must make monthly payments, which amounts to monthly compounding. What is the effective annual rate?

a. 15.27%

b. 16.08%

c. 16.88%

d. 17.72%

e. 18.61%

12. Suppose you borrowed $12,000 at a rate of 9.0% and must repay it in 4 equal installments at the end of each of the next 4 years. How large would your payments be?

a. $3704.02

b. $3889.23

c. $4083.69

d. $4287.87

e. $4502.26

13. Suppose you borrowed $14,000 at a rate of 10.0% and must repay it in 5 equal installments at the end of each of the next 5 years. How much interest would you have to pay in the first year?

a. $1200.33

b. $1263.50

c. $1330.00

d. $1400.00

e. $1470.00

14. Suppose you borrowed $15,000 at a rate of 8.5% and must repay it in 5 equal installments at the end of each of the next 5 years. By how much would you reduce the amount you owe in the first year?

a. $2,404.91

b. $2,531.49

c. $2,658.06

d. $2,790.96

e. $2,930.51